Indian steel giant Tata Steel Ltd (NSE:TATASTEEL) (BOM:500470) and Germany’s Thyssenkrupp AG (ETR:TKA) (FRA:TKA) signed an MOU a few days ago to merge Tata Steel’s and Thyssenkrupp’s European assets in a 50:50 joint venture which will be named Thyssenkrupp Tata Steel. The flat steel business of the two companies in Europe will be combined along with Thyssenkrupp’s steel mill services. Thyssenkrupp Tata Steel will focus on three main production hubs: IJmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales. The merger, expected to be finalized by end-2018, will create Europe’s second biggest steel producer. Luxembourg-based ArcelorMittal (NYSE:MT) remains as Europe’s, and the world’s largest steel maker.
About a decade after Tata Steel’s acquisition of Anglo-Dutch steel-maker Corus Group PLC for £6.2 billion (the largest acquisition by an Indian company at the time) a global oversupply of steel which resulted in a sharp decline in steel prices pushed Tata Steel to put up for sale its loss-making British operations in March last year – a plan which was subsequently abandoned. Despite muted demand for steel, global steel production dipped only in 2008 then resumed its climb, peaking in 2014.
For Thyssenkrupp, the merger will allow the German industry giant to focus on its more profitable industrial capital goods business. For Tata Steel which failed to sell its loss-making operations in Britain (where the company was reportedly losing as much as £1 million a day), the JV with Thyssenkrupp is a welcome development. The deal will reduce Tata Steel’s exposure to Europe which is facing heavy headwinds. And since Tata Steel’s Indian operations are more profitable than Europe, the company’s profitability should improve which would help Tata Steel’s steel expansion plans in India.
For the world’s steel industry which is plagued with overcapacity and financial strain, India is being touted as the next growth opportunity, partly thanks to a government-backed construction effort which is expected to drive Indian demand for steel. Already the world’s third largest steel consumer and third largest steel producer, rising steel demand and capacity additions are expected to help the country emerge as the world’s second-biggest steel consumer and producer in the years to come.
Of the world’s top five steel consuming countries, only India has shown consistent increases in steel consumption over the past few years according to data from the World Steel Association.
According to data from the World Steel Association, India’s steel consumption stood at 83.5 million tonnes last year and is expected to reach 88.6 million tonnes this year, representing a 6.1% increase in 2017. Increasing demand for steel in India has led to the country catching up with the United States. The World Steel Association expects India to overtake the United States as the world’s second-biggest steel consumer, a view that is echoed by the Indian Steel Association.
India still has considerable potential to increase steel consumption. India used just 63 kilograms of steel per person in 2016, compared with 493 kilograms in China and 207 kilograms worldwide.
This low per capita steel consumption coupled with the Indian government spending big on infrastructure projects such as affordable housing, are expected to help drive Indian steel demand. Under the recently approved National Steel Policy 2017, the government aims to increase per capita steel consumption to 160 kg by 2030. The policy also aims to invest INR 10 lakh crore towards increasing the country’s’ steel production capacity.
India is already the world’s third-biggest steel producer accounting for a 5.9% share of global crude steel output according to data from the World Steel Association. With the Indian government’s effort towards boosting production and consumption of steel in the country, India is projected to overtake Japan as the world’s second-biggest steel producer by 2019.
The opportunity has led to a flurry of investment activity in India’s steel sector which contributes about 2% to the country’s GDP. Tata Steel plans to double Indian steel capacity over the next five years. India’s biggest steel producer JSW Steel (NSE:JSWSTEEL) (BOM:500228) plans to double its size by 2030, spending billions in the process. Towards that goal, the company plans to build two new plants of 10 million metric tonnes each in the resource-rich states of Odisha and Jharkhand, as well as expand existing mills. State-run SAIL (Steel Authority of India Limited) (NSE:SAIL) has so far spent over INR 600 billion on the expansion and modernization of its Indian steel plants. SAIL was India’s leading steel producer for years before being overtaken by JSW Steel this year.